How the Affordable Care Act Tax Credit Works

Baseel Farah walks out of Leading Insurance Agency in Miami; the agency helps enroll people in health insurance plans under the Affordable Care Act.

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The Affordable Care Act (also known as "Obamacare"), a years-in-the-making overhaul of the American health insurance system, rolled out on Jan. 1, 2014, amid much fanfare and controversy. Opinions about the program tend to be extreme -- depending on whom you ask, the ACA is either a total fiasco or the best thing that's happened since sliced bread. But we're not here for that debate. This article will give you the facts on one crucial aspect of the act: the premium tax credit. This tax credit is the primary method by which the federal government is trying to make health plans offered in federal and state marketplaces more affordable.

To qualify for an ACA marketplace health plan, you must be a U.S. citizen or legal immigrant who does not have access to an "affordable and adequate" employer health plan. (We'll explain "affordable and adequate" later on.) To be eligible for the premium tax credit, your income has to fall within a certain range that would probably make it difficult for you to afford your own health insurance. You can choose to apply the credit in advance to your monthly premiums, or defer the credit until tax time. If you decide to receive the credit in advance, the IRS sends a portion of your premium directly to your insurer every month. If you defer the credit, you'll get it all as a lump sum to be applied to the taxes you owe (or the refund you're receiving). Not surprisingly, most people decide on the monthly payment option – otherwise, the premiums would probably be too much to handle [source: CBPP].

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So, how do you know if you're eligible for the tax credit? What exactly is the income range, and how much would you be expected to pay every month? If your employer does offer insurance but it doesn't seem like a good deal, can you decide to get a marketplace plan instead? We'll walk you through the qualifying process on the next page.